This study, conducted by IFMR LEAD, attempts to contribute to the ongoing debate of the short and long-term effects of demonetization on low income households who while formally banked, are among the most prone to adverse effects of demonetization policy, owing to their socio-economic, demographic and occupational profiles. The objective of this study is to ascertain the trends and patterns of financial and economic behavior post demonetization as well as to understand the difference in adoption and use of digital financial services before and after demonetization. We also aim to provide a narrative around the impact demonetization has had on such people’s day-to-day lives in terms of loss of work, inability to repay loans and to save. Lastly, we try and gain insights into people’s perceptions of the demonetization move in terms of benefits and pitfalls associated with the policy, and their changing attitude towards cash. In order to gauge both short term and long-term effects, we conducted three rounds of survey administered at regular intervals over a period of 9 months to understand the changing patterns and trends with respect to the financial behaviour before and after demonetization.

Methodology: The aim of the 1-year study was to identify the short-term and long-term impacts of demonetization on low-income, financially included households, with a focus on digital payment use and savings behaviour. Approximately 200 respondents were in each of the 4 study states: Maharashtra, Meghalaya, Tamil Nadu, Uttar Pradesh. The demonetization baseline survey was conducted in April 2017. The demonetization midline survey was conducted over phone in September 2017. The 20-minute survey was focused on respondents’ use of digital transactions and savings behaviour. The endline survey was conducted in January-February 2018. The data collection process was divided into the following phases: piloting, training, and data collection.

Results:

Short-term

• Respondents changed their financial behaviour depending on the availability of cash; resorted to alternate payment systems such as bartering and taking credit;
• Adverse effects on finding employment for casual labourers, as well as on on temporary employment. Delays in payment were also observed.

Digital payments
• No change in the use of digital payment methods and savings behaviour after more than 1 year after implementation of the demonetization policy;
• The absence of change is partially attributed to the lack of knowledge about digital products, coupled with lack of capability even if awareness exists;
• Eagerness to learn how to make digital payments in Meghalaya is higher relative to other states, warranting further exploring specific use cases for which people across geographies might find digital payments useful;
• Adoption and acceptance of digital payment methods on the supply side (i.e. among small shop vendors) and other vendors remained low, barring Uttar Pradesh. U.P., however, showed an initial spike in acceptance of digital payment methods, which dropped substantially two months’ post demonetization

Savings
• A majority of respondents report no change in their formal savings behaviour, attributing this to difficulties in accessing and using banking services.
• Underlying this is the fundamental inability to save due to lack of surplus income.